2011年11月3日 星期四

Big Bang: from optimism to anxiety.

London as a financial centre

Banged about

In the 25 years since Big Bang, the mood in the City has changed from optimism to anxiety. Can it recover?

Oct 29th 2011 | from the print edition

A SHORT walk east from the Bank of England’s building on Threadneedle Street takes you to the Broadgate shops-and-offices complex, built in the 1980s on the edge of the City, London’s main financial district. The shifting architecture on the journey traces the changes wrought by “Big Bang”, a set of new rules for the financial-services industry that came into force 25 years ago, on October 27th 1986.

The stone-clad buildings on the mazy streets and narrow lanes around the old Stock Exchange on Throgmorton Street, close to the Bank, housed the British firms that carved up London’s stockbroking and trading until the Big Bang reforms. The buildings are rarely more than five storeys high and are tightly packed, befitting an industry that was once close-knit and small-scale. Walking east, the streets widen and the buildings become larger and newer. These house some of the big investment banks, usually foreign-owned, which trade shares, bonds, currencies and derivatives on a scale that would have made an old-school City gent choke on his lunch.

These one-stop financial shops with vast trading floors are one legacy of Big Bang (the demise of the leisurely lunch is another). Foreign banks took advantage of the opening up of stockbroking to outsiders to establish a presence in London’s fast-growing financial centre. That influx of capital pushed up wages and, together with rising stockmarkets and lower income-tax rates, created a mood of optimism among City professionals.

A quarter of a century on, the City is far bigger: it established a second cluster in the early 1990s at Canary Wharf, a few miles east of Broadgate. But the mood is also much darker. Fears of renewed recession in the rich world and anxiety about the euro zone have dampened stockmarkets and made the lucrative fees from underwriting share and debt issues, or advising on big mergers, seem a distant prospect.

Investment banks have struggled to make money so staff will be cut. The CEBR, a consultancy that tracks the London economy, reckons City-type jobs (including in business services linked to finance) will fall by 27,000 this year to around 288,000, almost a fifth below their pre-crisis peak. On top of current anxieties are longer-term worries about unhelpful European regulation and the challenge to London’s status from emerging financial centres in Asia.

Once the City could have relied on government to fight its corner. But the protesters currently camped in the churchyard of St Paul’s Cathedral, near Paternoster Square, the Stock Exchange’s home since 2004, reflect a broader anger that makes it tricky for politicians to speak up for finance. The share of Britain’s GDP accounted for by financial services, including the retail kind such as arranging mortgages, has been steadily shrinking since 2007. If the City is cut down to size, so be it, say some. The economy should in any case be “rebalanced” away from creating paper assets and towards manufacturing.

The generous rewards in an industry that relied on taxpayer support to keep it afloat are indeed hard to stomach. More effective financial regulation is needed, even if some proposals seem misdirected. But the desire to stuff the City back into the narrow streets and poky buildings to which it was confined before Big Bang is at odds with the requirements of another kind of rebalancing: for exports to fire the economy at a time when government and consumers are tackling their debts.

Wholesale finance is one of the few industries in which Britain has large net export earnings. In the first half of 2011, the combined trade surplus of financial services and insurance was 2.6% of GDP, partly offsetting Britain’s deficit in goods (see chart). Net exports worth a further 0.5% of GDP are typically chalked up by related services, such as law, accountancy and consulting.

The message from these persistent surpluses is that the City, for all its faults, is a source of comparative advantage. One pound in every three managed in Britain is done so on behalf of foreigners, according to the Investment Management Association. London is the world’s leading centre for cross-border bank lending as well as marine insurance, according to CityUK, a lobby group. It accounts for two-fifths of global turnover in foreign exchange, more than New York and Tokyo combined, and similarly dominates the market for bespoke interest-rate derivatives. Britain is second only to America as a home to hedge-funds and private equity, even though the 50% tax rate on high incomes has driven some business to Switzerland.

The City’s lead in such niches owes something to the Big Bang-inspired emergence of London-based “full-service” investment banks. But its comparative advantage has deeper roots. One is its time zone: London’s trading day starts as the Tokyo market closes and a few hours before New York opens. The widespread use of English around the world gives London an edge over Frankfurt, Paris or Milan as Europe’s main financial centre. The legal system is a boon: where there are parties from several different countries in a deal—say a Dutch firm selling an African business to an Asian rival—they often choose to have the contract drawn up where there is a good body of commercial law and experienced judges. That Britain itself is open to foreign direct investment gives London an edge in arranging cross-border deals.

The fire next time

These blessings should in theory reinforce each other. The City’s financiers, lawyers and accountants benefit from proximity. The speedy exchange of information is a competitive edge. This also explains those big trading floors: the hope is that the trader of European bank shares, say, will pick up useful knowledge from his firm’s interest-rate or currency analysts. Most of all, London benefits from incumbency and a long history as a financial centre. Trading creates liquidity, which attracts more business (and skills) in a virtuous circle.

London’s long-term prospects depend on its ability to sustain these attractions—and to rekindle the competitive fire that the Big Bang reforms aimed to spark. City bigwigs worry that much EU regulation is designed to undermine London and favour other financial centres in Europe. A bid by the European Central Bank to force clearing houses settling trades in euros to locate in the euro zone is one such threat. A proposed tax on financial transactions, which would divert business from Europe, also causes dismay. The burgeoning emerging-market demand for finance should be an opportunity. The risk is that fighting battles closer to home means it is missed.

Big Bangnoun

The deregulation of the London Stock Exchange on (27 October 1986), when a number of complex changes in trading practices were put into effect simultaneously. (1983 —) .

[From the earlier senses, creation of the universe in one cataclysmic explosion, hence any sudden forceful beginning.]